Unsustainable, Chaotic, and With No Room for Discretion

September 16, 2016

WASHINGTON, D.C. – The House Budget Committee in a hearing Wednesday entitled “Growing Risks to the Budget and the Economy” examined our nation’s current troubling fiscal and economic outlook, what is contributing to a forecast of slow growth and mounting debt, and how policymakers might go about correcting course.

The consensus among the witnesses was unanimous that the current trajectory of deficit spending and higher debt cannot go on forever. As Dr. Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities, noted: “It’s an unsustainable trend when you start looking at numbers that are really in the stratosphere in the out years.”

Among the reasons America’s fiscal outlook is unsustainable is due to the unchecked growth in automatic spending on the nation’s health, retirement, and economic security programs – programs that suffer not only from a looming funding crisis but also structural challenges that mean they fail today and will certainly fail in the years to come to deliver on the promises made to beneficiaries. As Dr. Douglas Holtz-Eakin, President of the American Action Forum, testified:

“Our Social Security program is kept ‘solvent’ on the books…because we have promised to cut benefits 25 percent across the board when the trust-fund exhausts in a little under two decades. That is a horrific way to run a pension program. So, if you go through Social Security, Medicare, Medicaid, Affordable Care Act – the large drivers of the spending-increase that is our deficit problem – those programs all could be improved. They’re not delivering at sensible cost the services that we have promised.”

If nothing is done to shore up these programs and if a fiscal crisis is allowed to occur, the results will be “chaotic” according to Dr. John Cochrane, Senior Fellow at the Hoover Institution:

“What certainly will happen is a fairly chaotic cut in benefits. What happens to countries when they run out of their fiscal ability, is people who are counting on Social Security, their cuts come big and heavy and unpredicted…Health care is going to get rationed and really cheap, and people who are counting on Medicare are not going to get it. So, you want to reform those programs predictably ahead of time and not when you run out of the ability to borrow money and suddenly people who are counting on it are thrown out on their own.”

At the end of the day, the failure to get the nation’s fiscal house in order – to let the automatic spending side of the federal budget continue expanding while the discretionary portion is crowded out – is a direct threat to the ability of Congress to be responsive to the needs of the nation. As Dr. Holtz-Eakin pointed out, “there is no room for discretion”:

“If you are locked in to spending the money on interest – because you must honor those obligations – and you are locked into spending on entitlements, there is no room for discretion. And it seems quite wrong in a representative democracy to in 2016 dictate exactly what we are going to be doing in 2026, 2036, and 2046 – even in the absence of a crisis which will also then happen.”

The solution? For starters, raise the long-term rate of economic growth – which is currently projected to grow by roughly two percent over the next decade, substantially lower than the historical average of just over three percent:

“The key issue going forward is what can raise the trend long-term rate of economic growth. And that’s not a matter of stimulus or austerity. That’s a matter of what will enhance productivity; what will enhance the rate of labor force participation; and the kinds of components that go in to GDP growth. Those are issues associated with structural reforms to have better incentives – whether they are in our social safety-net or in our tax code.”

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